investment risk advisory firm. Currency
management is a matter of growing interest
among Bridge Mason’s clients, with inquires
almost doubling over the past six months,
according to Fung.

“In the medium-term,” he said, “the
dollar’s rise may be further exacerbated as
trade protectionism and fiscal cuts manifest
through policies presented by the Trump
administration and as certain populist
movements continue to perpetuate as seen in
France, the UK, and Italy.”

Dollar Assets for DollarLiabilities

Van Vleet agrees. For example, if the Trump
administration implements a border tax
adjustment, it may result in a 20% appreciation of the dollar. There is about a 30%
probability that the tax adjustment will
occur, Van Vleet said, citing a Goldman
Sachs research report.

About 15% of Textron’s $6.3 billiondefined benefit plan is exposed to non-USdollar assets. Further, as some plans de-risktheir portfolios, minimizing volatility byhedging currency exposure becomes increas-ingly important. “You have dollar liabilities,you should have dollar assets,” said VanVleet. “Getting rid of your currency risk,whether you sell it or hedge it, should also bepart of your de-risking glide path.”Textron is not the only investor contem-plating its FX risk. The $57 billion AlaskaPermanent Fund Corporation hosted aforeign exchange panel discussion at itsDecember meeting, according to internaldocuments. Currency risk management hasbeen an increasing concern and opportunityfor the fund as it internationalizes its hold-ings, CIO Russell Read noted. About 18%of the plan’s portfolio is exposed to non-U.S.public assets.

“Investing for the long-term means notlimiting the geographies we look to investin,” Angela Rodell, CEO of the Perma-nent Fund, stated in December. “Much ofour outperformance this fiscal year can beattributed to our overweight exposure tonon-US equity.”Given its exposure to non-U.S. devel-oped assets, the $14.5 billion New MexicoPublic Employees Retirement Associ-ation issued a request for proposals inMarch, seeking passive currency hedgingservices. About $2 billion of the plan’sassets were exposed to non-US assetsat the end of last year. CIO Jon Grabelbelieves that while currencies tend toneutralize over time, a passive approachcould minimize the fund’s volatility andbenefit the plan as a whole, according tomeeting documents.

Because institutional investors such
as pension funds and endowments keep a
long-term focus and can withstand short-term volatility, hedging foreign exchange
exposure should be more of a strategic
play, Fung argues.

Asset owners need to be wary of the
potential costs associated with hedging
currency exposure, but that mitigating
such risks could also present opportunities
elsewhere to create excess return. “While
each situation is unique, we generally
recommend hedging only some of the
non-US dollar developed exposure,” he
said. “A partial hedge could alleviate some
of the stress on the portfolio and potentially
allow more risk appetite to generate alpha.
It is all about balance.” —Amrita Sareen-Tak

“GETTING RID OF YOUR CURRENCY

RISK WHETHER YOU SELL IT OR
HEDGE IT, SHOULD... ALSO BE PART
OF YOUR DE-RISKING GLIDE PATH.”